DMC Global Inc (BOOM) 2014 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Dynamic Materials Corporation's 2014 first-quarter conference call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Geoff High. Thank you, sir. You may begin.

Thank you, Jan. Good afternoon and welcome to DMC's first-quarter conference call. Presenting on behalf of the Company will be President and CEO, Kevin Longe; and Senior Vice President, Rick Santa.

I would like to remind everyone that matters discussed on this call may include forward-looking statements that are based on management's estimates, projections, and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in DMC's filings with the Securities and Exchange Commission. The Company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements.

DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today's call will be available at dynamicmaterials.com after the call. In addition, a telephone replay will be made available beginning approximately two hours after the conclusion of the call.

Details for listening to today's replay or webcast are available in today's news release. And so with that, I'll now turn the call over to Kevin.

Thanks, Geoff, and good afternoon, everyone. Before we discuss our first quarter, I would like to introduce Mike Kuta, our new Chief Financial Officer, who recently joined DMC from Berkshire Hathaway's Lubrizol Corporation. Mike brings a strong financial management background and extensive experience with global industrial operations. We are excited to have Mike on the DMC team and look forward to his contributions.

Former CFO Rick Santa is commencing his new duties as Senior Vice President of Business Development. As many of you know, Rick has been DMC's CFO for the past 18 years, and he has been a key contributor to our growth and success. I'd like to thank Rick for his dedicated service and look forward to working closely with him in his new senior leadership role as we pursue strategic growth initiatives.

Our first-quarter financial results were in line with our forecasts and benefited from strong performance of our oilfield products segment, which includes DYNAenergetics and AMK Technical Services. These businesses combine to deliver a 17% year-over-year improvement in sales and a 7 point increase in gross margin, which increased from 34% of sales in last year's first quarter to 41% of sales this year. This increase resulted from our emphasis on selling higher technology products and our continued focus on being compensated for that technology.

DYNAenergetics, our perforating business for oil and gas wells, is experiencing favorable market conditions, especially in North America and the Middle East. The new DynaSelect detonator system we told you about during our last call is generating strong demand in North America's unconventional shale plays, where the system-selected perforating and RF-safe features are providing customers with improved efficiency and safety in their well completions.

The success of the DynaSelect system is the result of our strong research and development organization based in Germany. This team is working on several new products that will extend DYNAenergetics's capabilities in the perforating market.

We will be introducing one of these new product lines, the DynaStage Gun System, at the Offshore Technology Conference in Houston next week. DynaStage leverages the safety and selective pictures of the DynaSelect detonator system and also provides customers with increased efficiencies at the wellhead. This gun system is fully customizable it comes preassembled, meaning it does not require field wiring or loading. It can also be used in both conventional and unconventional completions. We believe it represents a major step forward in perforating technology, and we look forward to introducing it to the market.

In Nobelclad, bookings remained slow, despite continued strong quoting activity, particularly on projects in the global energy and chemical markets. Many of our fabricator customers are reporting similar disparities between quoting and booking activity.

There are signs that investment activity is improving, especially in the chemical industry. The American Chemical Council reported in February that 148 projects are slated for construction in the US, thanks largely to the abundance of low-cost natural gas. These projects are expected to command more than $100 billion in capital investments in the coming years.

The Nobelclad team has been evaluating these projects and is in regular communication with many of the fabricators and engineering companies expected to be involved. Although much of the initial infrastructure involves chemicals that are not highly corrosive, we anticipate an eventual progression towards downstream projects that could involve more aggressive derivatives requiring Nobelclad's superior explosion clad plates.

I'm encouraged by the growing strength of DYNAenergetics. Cautiously optimistic that Nobelclad will see a rebound in demand in the coming quarters.

I will now turn to call over to Rick for a review of our first quarter financial performance. Rick?

Thanks, Kevin, and good afternoon, everyone. Our first-quarter sales increased 4% to $48 million versus Q1 last year. Gross margin improved to 30% from 28% in last year's first quarter. Gross margin was above our forecast range of 27% to 28%, which was simply due to the favorable product mix in our oilfield products business.

Operating income was $2.8 million, up from an operating loss of $1.1 million a year ago. Remember that last year's first quarter included $3 million in nonrecurring expense associated with management retirements.

First-quarter net income was $1.6 million or $0.12 per diluted share, up from net income of $215,000 or $0.02 per diluted share in Q1 a year ago. Last year's first-quarter net income benefited from a $1.2 million tax benefit.

Adjusted EBITDA increased 107% to $6.9 million from $3.3 million in the 2013 first quarter. Our balance sheet at the end of the first quarter showed that we maintained a strong financial position. At March 31 we had cash and cash equivalents of $9.1 million, working capital of $70.5 million, and a current ratio of 3.5 to 1.

Current liabilities were $27.8 million, and total liabilities were $64.6 million. We closed the quarter with net debt of $18.3 million, and stockholders' equity was $172.3 million.

With respect to guidance, we are maintaining our prior full-year forecast for revenue, which we expect will be flat to up 4% versus last year's $209.6 million. Gross margin guidance remains at 29% to 31% versus 28% last year. Our blended effective tax rate is expected to remain 29% to 31% versus 28% last year. Our blended effective tax rate is expected to range from 29% to 30% based on our full-year projected pretax income.

For the second quarter we expect sales will be down 5% to 7% from the $57.9 million we reported in last year's second quarter, but up 12% to 14% from our first-quarter revenue of $48 million. Gross margin is expected to be in a range of 29% to 30% versus 30% in last year's second quarter.

SG&A expense should be a range of $10 million to $10.2 million, and second-quarter amortization expense should be approximately $1.6 million. Interest expense for the quarter is expected to be approximately $120,000.

Before I open the call up for questions, I, too, want to welcome Mike to the DMC team. He and I have worked closely over the past few weeks, and I echo Kevin's sentiments. I am very glad to have him on board. Mike?

Thanks, Rick and Kevin, and hello to all of you on the call. Let me just briefly say I am excited about my new role at DMC and by the opportunities the Company is pursuing. I'm also looking forward to getting to know many of you in the months and quarters ahead.

Jan, I believe we are now ready to take any questions.

(Operator Instructions) Edward Marshall, Sidoti & Company.

Good afternoon, guys. Welcome, Mike. So I wanted to just circle back on a few things. I didn't see you, like some of the industrial companies out there, talk about weather at all, either in the comments or the press release. I'm just curious: did whether have any impact with you in the quarter -- I guess especially with some of the fracking stuff that you sell?

I think some of the other companies in the industry reported that it impacted their first quarter. However, we have a number of things going on. I think that the improvement that we had in our product lines offset some of the geographical and weather-related things. And so we came in, quite frankly, where we anticipated in the quarter.

And the next question I want to talk about is kind of the facilities that are going on overseas in Siberia. And I'm just kind of curious as to -- can you make any comments? Obviously, there's been a lot of sanctions and so forth that have been directed in that region, and I'm just kind of curious as to maybe any impact that you foresee, or any kind of difficulties you have with construction there? And is that project still on time?

First of all, as you know, these things are unfolding as we speak; but I can state that to date, we have not seen a slowdown in activity on the construction project. We're moving forward with our investment.

We expect that investment to be fully operational by the end of the third quarter of this year. So we're on target with it.

We have seen -- certainly, the ruble has depreciated relative to the dollar and some of the other currencies. And we're concerned, but we're focused on the long-term and hoping that this is something that is more short-term in nature.

Last year Russia and associated countries was less than 4% of our revenues and insignificant from an income standpoint. And so its impact on us going forward is really in expectations for growth and also the value of the investment on the balance sheet.

Right. And how far along are you? I know that was supposed be done sometime at the end of 2014. How far along are you? Are you still on target?

Yes, we are on target. The equipment is shipping as we speak. Three out of the four main parts of this project are complete. There's a gun manufacturing facility that's complete; a power plant that serves the whole campus and the office, and that part of the business is up and running successfully.

The remaining part is the shape charge manufacturing facility, which is under construction. The buildings are up. They are being finished out. The equipment is going to be installed in June and July. And we're going to start commissioning in September and October and hopefully be fully operational in November.

If I look at the margins from oilfield products just a bit, and I look at the performance there -- and I know sometimes you have kind of some tender offers, those tender kind of transactions that run through that business. Was there any other thing that might be fuzzy in the quarter that might be throwing that number? Or is that just kind of better demand and improved customer activity, and then, obviously, servicing from a much closer location that's actually paying dividends? Will that carry through the remainder of the year 2014?

Yes, that's a good question to ask. The biggest impact on the margin was product mix, with our DynaSelect switch detonator system taking hold with a major customer. And that's a very high-margin product, and so that pulled our margin up in addition to the additional volume. And we expect that to continue throughout the full year.

Having said that, we have some large --.

Yes, the Indian tender will ship in Q2, and I believe the value of that order this year is $3.2 million. That carries a slightly lower margin, because it's pretty competitively bid.

So it will be offsetting -- some offsetting characteristics between those two programs, I imagine.

Yes. That's mostly hardware versus the higher technology of the DynaSelect system.

Okay. And then finally, Rick, I may have missed it, but did you give kind of an outlook -- I know you gave it for amortization, but did you give an outlook for SG&A, either for -- and if you didn't, maybe you could for the quarter and for the full year?

Yes. The guidance is for $10 million to $10.2 million of SG&A per quarter.

Okay.

That includes amortization expense, which is estimated at $1.6 million.

That excludes --

It includes amortization expense. That's right.

Okay. All right, thank you.

Avinash Kant, D.A. Davidson & Co.

A few questions -- the first one, actually, a little bit on the explosion clad side. I think you were making some remarks about the use of these corrosion-resistant materials in the chemicals industry versus the oil and natural gas. Are you implying that the chemicals industry actually uses a little bit less of these versus the oil and gas, or not?

It depends on the type of projects that are going on, Avinash, and ethylene-based projects are cleaner than a lot of oil and gas things that we get into. But typically the oil and gas is dirtier, more corrosive. We'll see a much higher utilization of our clad plates and oil and gas versus chemical.

Okay. And the improvement in margin that you have been seeing -- does it also have some component of the fact that you have the Texas facility running now? If it is, then what -- how much of the component?

I don't think it is benefiting us at this point in time, Avinash, with operating one shift. You know, and that one shift happened to absorb the full fixed overhead of that new facility. So I would say in the first quarter, it was actually slightly negative -- more than offset by the favorable product mix and the strong DynaSelect sales.

So then how should we see that changing? And then how could the impact be over the next few quarters that we are seeing this year and beyond? Like, when do you expect to go to more than one shift?

Over the summer we expect to go to more than one shift. We're looking at that right now. We're being very cautious to make sure that we expand at a rate that we can educate and train the employees, because they are working with explosives. The demand is there for the product. And we expect probably by the end of the second quarter, beginning of the third, to be working on a second shift.

And at that point it will start to add to margins?

I would think once we get up to two full shifts, and provided we are selling through -- and, you know, that would be our intent -- that we should see a modest benefit this year and a larger benefit as we move into 2015.

Okay. And the tax rate exemptions that you have, have you assumed that the R&D tax credits will go through or not? And what's the impact of that?

What was the question?

The tax. Tax credits.

R&D.

I don't think we factored those into our forecast.

Okay. And then in terms of CapEx, what kind of CapEx are you targeting for 2014?

In the $12 million range, with the majority of that being associated with completing the Tyumen facility.

So the second and third quarters will have a higher CapEx?

Yes. Very much so.

Okay.

And then, in fact, we'll see half that CapEx in the second and third quarters. A little bit greater than that.

More than 50% in the two quarters. And then, a little bit -- in terms of the trend, I can see the full-year guidance, of course, is unchanged; and you have given guidance on the Q2. So what's the directionality of revenues in Q3/Q4? Is it growing from here all through? Or is it up in certain quarters and down in certain?

Yes. You know, I think the strongest quarter on the Nobelclad side of the business would be the fourth quarter, as we hopefully start to build backlog. And in most years we've seen a little bit of fall-off in DYNAenergetics in Q4. So I would expect Q4 to be a little bit stronger than Q3.

So it looks like sequential growth could grow through all the way to Q4?

Yes.

On margin. Okay. Perfect. Thank you so much.

(Operator Instructions) Gerry Sweeney, Boenning & Scattergood.

A lot of my questions have been asked, but just circle back to oilfield services. Kevin, you mentioned that you didn't necessarily see an impact from weather, or it maybe was masked because you had a lot of positive pullthrough on product.

But I'm curious as to the tone of the business out there versus 4Q. 4Q was a little bit slower; I think people were heading into the end of the year and weren't that interested in upping their CapEx. But I'm interested at the tone of spending and pullthrough into 1Q, and what you're seeing in the second quarter, as well.

We're -- the Q1 had started off strong. We also have the Indian tender, which is going to be shipping in -- the majority of that in Q2. So we expect growth into Q2 for this business.

And we are in a strong market. And we are introducing a strong product, or have a strong product that we introduced last year, followed by what we believe is going to be another strong product that we are introducing next week.

And you know, those products take time to ramp, but we feel that the ramping on the DynaStage is going to be faster than the DynaSelect from a training standpoint. And so we're very -- we feel very comfortable with our forecast for the year in this business because of its strong market and the products that we're introducing.

And we still have a very small share of that overall market. And we're approaching it from a technology standpoint in order to improve our share position. And so we feel pretty good about it.

Okay. Then just jumping over to -- oh, no, I'm sorry -- staying with oilfield services or DYNAenergetics, how much is the total investment in Russia in that plant?

$16 million?

That's correct.

Okay. Got it. I just wanted to clarify that. And then on the explosive welding, obviously, you know, I have talked to you a little bit about tailwinds from the chemical business, etc., and maybe -- obviously, you mentioned the ethylene business may not -- is cleaner and doesn't have as much draw for the Nobelclad business.

But when you talk to your clients, and they are talking about increased activity but not necessarily seeing the pullthrough on the orders, is this a timing issue? Is there any inclination that we will see an acceleration in orders? Again, this is probably more qualitative, but any type of suss or guidance you could give us on that front?

Yes. We see -- I guess to put it in perspective, our quoting activity is up significantly in how we measure it, when we compare the first quarter of 2014 to the first quarter of 2013. And so that's leading the cautious optimism on our part.

There's quite a lag time between quotes and orders, and we had hoped by now we would be seeing an increase in bookings, to be honest with you. And so we are cautiously optimistic, anticipating an increase in coming orders for the balance of the year. But as you can see from where our bookings and backlog is, we did not see that in the first quarter.

Okay. That's it from my end. Thank you.

Edward Marshall, Sidoti & Company.

So I'm curious -- could you quantify the pickup in quoting activity year over year? Is there any way to do that? And the quoting activity that you might have had in 2013 -- because I think it's been relatively strong throughout -- have you seen those orders go elsewhere? Or is it just a continuation of what we've seen, of just continuing to quote, and just standing still, and not a lot of movement?

It's the continuation. And we're up well over 20% in terms of the quotes in the first quarter compared to one year ago.

And do you have that versus the fourth quarter?

I think it's been carrying through. I don't have the chart in front of me, but I'll have that next time that you ask it. But we're seeing fairly strong quoting activity in the second half of last year and in the first quarter of this year.

Okay. And the second part of that is: if we don't see those quotes actually turn into orders sometime in 2Q, you are pretty standard at this $24 million to, say, $25 million throughout the remainder of the year, right? There's not a drag or anything along those lines -- this is what you'd anticipate that you'd continue? Because obviously, you did book some in the quarter, having a positive backlog and $24 million in sales.

Yes. And I think you can see from our guidance, too, Ed, that we had that flat to 4% for the whole Company this year. And we're having the growth in DYNAenergetics, so we are forecasting a fairly slow year for Nobelclad. But we don't see it dropping at all below where we are today.

And this is simply -- the backlog is down, say, roughly 8% to 10%, and that's kind of where we see the Nobelclad coming in for the full year based on where backlog is. Is that kind of the same comment you gave last quarter, and there's just been no change to it?

Again -- is that right, first? Secondly, if the orders don't come in 2Q, it will be too tough for you to ship them in 2014 and be a 2015 event. Is that right?

No. That's not exactly the case. I think if you look at where we finished last year -- $118 million in sales -- and we have a $10 million negative change in the beginning of the year backlog, most of that negative change, unless we see a pickup very quickly, it would show up in the full-year sales results, meaning that we could be off by up to $10 million in our Nobelclad sales for the full year. But with the lead time now on metals, if we book even a sizable order, we've got a good chance of shipping a lot of that order inside of three or four months.

Okay. And kind of down $10 million or so is roughly implied in your guidance is basically what you're saying, correct?

Correct.

So the risks are to, I guess, the upside, unless something falls off pretty dramatically?

Yes. And based on the quoting activity and the quality of quotes, we don't expect that fall-off at this point in time.

Okay. Great. Thanks, guys.

Thank you. At this time there are no further questions. I would like to turn the floor back to management for any closing comments.

Thank you, everybody, for joining us on today's call. And we are encouraged by the start to our FY2014 -- and cautiously, as I mentioned, optimistic about the near-term opportunities. We look forward to updating you on our progress at the end of the second quarter. So thank you for joining us.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You make disconnect your lines at this time. Thank you for your participation.